For years, the investment narrative surrounding China has been a binary struggle between those who see an inevitable global hegemon and those who foresee a systemic collapse. For the traditional “long-only” investor—someone who simply buys shares and hopes the market rises—this volatility has been punishing. The collapse of the property sector and a tightening regulatory grip on tech giants have turned what was once a growth engine into a source of significant portfolio anxiety.
Enter the “long/short” strategy, a sophisticated approach currently being championed by Pictet Asset Management. Rather than betting on the entire Chinese economy to lift all boats, this strategy operates like a surgical strike: it seeks out the specific winners of China’s industrial evolution while simultaneously betting against the companies destined for obsolescence. It is a shift from betting on a country to betting on a transition.
This approach is particularly relevant now as China pivots from a growth model fueled by infrastructure and real estate toward one driven by “high-quality development”—a government term for advanced manufacturing, green energy, and technological self-reliance. In this environment, the gap between the leaders and the laggards is widening, creating the exact kind of dispersion that long/short managers crave.
The Mechanics of Alpha in a Volatile Market
To understand why Pictet AM is emphasizing this strategy, one must first strip away the jargon. In a standard investment fund, if the Chinese market drops 10%, the fund generally drops as well. A long/short fund, however, holds “long” positions in companies it expects to rise and “short” positions in those it expects to fall.
If the market crashes, the losses on the long positions can be offset by the gains from the short positions. The goal is not necessarily to track the index, but to generate “alpha”—returns that are independent of whether the overall market goes up or down. For the modern investor, this transforms China from a high-risk gamble into a managed exposure.
The current Chinese landscape is ripe for this because of “divergence.” We are seeing a stark divide between the “Old Economy”—bloated state-owned enterprises and debt-ridden property developers—and the “New Economy,” which includes global leaders in electric vehicles (EVs), lithium-ion batteries, and renewable energy. By going long on the innovators and short on the legacy giants, managers can profit from the structural decline of the old system even while the broader index remains stagnant.
Identifying the Winners and the Dead Weight
The “long” side of the ledger is currently dominated by China’s push for “New Three” industries: batteries, EVs, and solar products. These sectors are not just domestic successes; they are global exporters. Despite increasing tariffs from the U.S. And EU, the sheer scale and efficiency of Chinese green-tech supply chains make them formidable. Pictet’s approach focuses on companies with genuine pricing power and technological moats rather than those merely benefiting from government subsidies.
Conversely, the “short” side targets the systemic vulnerabilities of the Chinese economy. The most obvious target is the real estate sector, which once accounted for roughly 25% of China’s GDP. With the crisis surrounding giants like Evergrande and Country Garden, the era of effortless property appreciation is over. Shorting the periphery of this sector—including related construction and materials companies—allows managers to hedge against a prolonged property slump.
| Feature | Long-Only Strategy | Long/Short Strategy |
|---|---|---|
| Market Dependency | High; requires overall market growth | Low; profits from relative performance |
| Risk Profile | Exposed to systemic crashes | Hedged against broad market declines |
| Primary Goal | Beta (Market tracking) | Alpha (Manager skill/Selection) |
| Ideal Environment | Strong Bull Market | Volatile or Sideways Market |
Navigating the Geopolitical Minefield
No discussion of Chinese assets is complete without addressing the “political risk premium.” The unpredictability of Beijing’s regulatory pivots—such as the 2021 crackdown on private tutoring and gaming—can wipe out billions in market value overnight. The escalating trade war with Washington creates a ceiling for many Chinese firms.
A long/short strategy provides a critical safety valve here. If a new round of sanctions hits the tech sector, a manager who is short on vulnerable firms can mitigate the blow to their long positions. It allows for a “neutral” exposure, where the investor is not betting on the geopolitical climate improving, but rather on the fact that some companies will navigate that climate better than others.
However, constraints remain. Shorting in Chinese markets is more complex and costly than in the U.S., often requiring the use of derivatives or specialized lending vehicles. This is why the strategy is typically reserved for institutional investors or high-net-worth individuals through managers like Pictet, who have the infrastructure to execute these trades efficiently.
“The opportunity in China has shifted from a macro play to a stock-picker’s market. The tide is no longer lifting all boats; in fact, for many, the tide is going out.”
Disclaimer: This article is for informational purposes only and does not constitute financial, investment, or legal advice. Investing in emerging markets and employing long/short strategies involves significant risk, including the potential loss of principal.
The immediate focus for observers will be the next series of People’s Bank of China (PBOC) policy announcements and the upcoming quarterly GDP data, which will reveal whether the transition to “high-quality growth” is gaining real traction or if the property drag is too heavy to overcome. These data points will likely dictate the rotation of long/short portfolios for the remainder of the year.
Do you believe the “New Economy” can offset China’s property crisis, or is the systemic risk too high? Share your thoughts in the comments below.
